The Monetary Policy Committee (MPC) met for its second meeting of the year on the 22nd and 23rd of March 2021. As we had anticipated, the Committee voted to leave all parameters unchanged.
The Committee was once again confronted with a policy dilemma – having to decide between hiking rates to combat the spiraling inflation, which would jeopardize the economy’s fragile escape from recession, or to keep supporting the post-pandemic recovery by maintaining an accommodative stance. The Committee was equally concerned by the rising rate of unemployment in the country. In the end, the committee favored its pro-growth stance, choosing to maintain the benchmark rate at 11.50%. However, we observe that that the strength of a wait and see approach is weakening as a third of the Committee voted for policy rate hikes with varying magnitudes. Furthermore, the MPC called for collaboration between monetary and fiscal authorities in funding critical sectors of the economy to boost aggregate supply and tame rising inflation.
Commenting on vaccination efforts, the Committee voiced concerns over the efficacy of vaccines in combating the new strains of the coronavirus, as well as the imbalance in vaccination rates – citing both factors as downside risks to global economic recovery.
As the Committee’s decision to hold rates does not signal a change in market dynamics (or change in the direction of inflation) in the near term, we expect yields in the fixed income market to continue its sluggish ascent, while real rate of return remains in negative territory.
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